Friday, May 27, 2016

Lobbyists And Corporate Profits

Profits are up. Operating margins for firms publicly listed in the US show a substantial and sustained rise. Corporate valuations are up as well.

Much of this result is driven by the role of regulation, so it is important to understand the link between regulation and profits. Lobbying and political campaign spending can result in favorable regulatory changes, and several studies find the returns to these investments can be quite large. For example, one study finds that for each dollar spent lobbying for a tax break, firms received returns in excess of $220.

Critics of the regulatory state regularly decry the costs imposed by regulations. Yet even regulations that impose costs might raise profits indirectly, since costs to incumbents are also entry barriers for prospective entrants. For example, one study found that pollution regulations served to reduce entry of new firms into some manufacturing industries.

Even when regulators try to reduce prices, firms can benefit. For example, in 1992 Congress passed the Cable Television Consumer Protection and Competition Act in response to high cable TV rates. Regulators expected cable prices to fall by 10%. Instead, however, cable companies changed their programming bundles, prices did not fall, and corporate valuations increased. Instead, hows that the aggregate market value of cable companies relative to assets (Tobin’s Q) rose following the Act, compared to valuations of other firms. Firms experiencing major regulatory change see their valuations rise 12% compared to closely matched control groups. Smaller regulatory changes are also associated with a subsequent rise in firm market values and profits.

Research supports the view that political rent seeking is responsible for a significant portion of the rise in profits. Firms influence the legislative and regulatory process and they engage in a wide range of activity to profit from regulatory changes, with significant success. The link between regulation and profits is highly concentrated in a small number of politically influential industries. Among non-financial corporations, most of the effect is accounted for by just five industries: pharmaceuticals/chemicals, petroleum refining, transportation equipment/defense, utilities, and communications. These industries comprise, in effect, a “rent seeking sector.” Concentration of political influence among a narrow group of firms means that those firms may skew policy for the entire economy. For example, the pharmaceutical industry has actively stymied efforts to address problems of patent trolls that affect many other industries.

While political rent seeking is nothing new, the outsize effect of political rent seeking on profits and firm values is a recent development, largely occurring since 2000. Over the last 15 years, political campaign spending by firm PACs has increased more than thirtyfold and the Regdata index of regulation has increased by nearly 50% for public firms. However much political rent seeking has affected economic dynamism and inequality so far, the effect is likely to be greater in the near future.

Socialists are not surprised by such reports as the above. The State, after all, according to Marx, is merely the executive committee of the capitalist class.